Article written by:
Sara Goldhardt, CPA
Director, State and Local Tax Services
Lorani Orobitg, CPA
Manager, Tax and Business Advisory Services
The Employee Retention Credit is a refundable tax credit against certain employment taxes equal to 50 percent of the qualified wages an eligible employer pays to employees after March 12, 2020, and before January 1, 2021. The maximum credit is $5,000 per employee.
Eligible employers that are entitled to claim the Employee Retention Credit are private-sector businesses and tax-exempt organizations that carry on a trade or business during calendar year 2020, and either:
- Have operations that were fully or partially suspended during any calendar quarter in 2020 due to orders from an appropriate governmental authority limiting commerce, travel, or group meetings (for commercial, social, religious, or other purposes) due to COVID-19; or
- Experienced a significant decline in gross receipts during the calendar quarter. A significant decline means gross receipts for a calendar quarter in 2020 are less than 50 percent of gross receipts for the same calendar quarter in 2019.
If an employer receives a Small Business Interruption Loan under the Paycheck Protection Program authorized under the CARES Act, then the employer is not eligible for the Employee Retention Credit.
The definition of qualified wages depends on how many employees an eligible employer has.
- If an employer averaged more than 100 full-time employees during 2019, qualified wages are generally those wages up to $10,000 per employee, including certain health care costs, paid to employees that are not providing services because operations were suspended or due to a decline in gross receipts. These employers can only count wages up to the amount that the employee would have been paid for working an equivalent duration during the 30 days immediately preceding the period of economic hardship.
- If an employer averaged 100 or fewer full-time employees during 2019, qualified wages are those wages up to $10,000 per employee, including health care costs, paid to any employee during the period operations were suspended or the period of decline in gross receipts, regardless of whether or not its employees are providing services.
No Double Dipping
- Wages for this credit do not include wages for which the employer received a tax credit for paid sick and family leave under the Families First Coronavirus Response Act.
- Wages counted for this credit cannot be counted for the credit for paid family and medical leave under section 45S of the Internal Revenue Code.
- Employees are not counted for this credit if the employer is allowed a Work Opportunity Tax Credit under section 51 of the Internal Revenue Code for the employee.
How to Claim the Credit:
There are three ways to claim the credit:
- Filing Form 941, Employer’s Quarterly Federal Tax Return – Note that the credit will be added in time for filing the second quarter 2020 form. Qualified wages paid between March 12 and March 31 should be reported on the second Quarterly Federal Tax Return due July 31st.
- Reducing the next required federal tax deposit, which includes taxes withheld from employees, by the anticipated credit.
- Filing Form 7200 to request an advance on the credit. This method should only be used if the anticipated credit is greater than the required federal tax deposit.
Other Items to Note
It is important to note that there are aggregation rules that apply in determining when related entities must be treated as a single employer for purposes of the Employee Retention Credit. Groups of corporations or entities under common control must consider the aggregation rules when determining whether the employer’s business was fully or partially suspended, whether the employer has had a significant decline in receipts, whether the employer has more than 100 full-time employees and if any member of the aggregated group has received a Paycheck Protection Program loan. The aggregation rules may have a significant impact on an employer’s eligibility for the credit.
A special rule prohibits the application of the credit for wages paid to an employee that exceeds the amount the employee would have been paid for working the same amount of time during the prior 30- day period. This may cause issues for employees who work on commissions, and such situations may need to be addressed by future guidance from the IRS.
In order to avoid a double tax benefit, the CARES Act provides that the deduction for wages paid shall be reduced by the amount of the tax credits received. Furthermore, the credit will not be available for wages paid to owners of a business or their relatives.
If an employer uses a Professional Employer Organization (PEO) to provide staffing, the tax credit belongs to the employer, not to the PEO. The PEO is required to provide information to the employer so that the employer can use the information to claim the credit.
On the Horizon
- Lawmakers are proposing increasing the value of the tax credit per employee per quarter from $5,000 for the remainder of the year to $12,000 per quarter.
- The bill also would remove some limits for how many employees the business must have to qualify and make it easier to demonstrate the need for the tax break.
- Under the proposed bill, employers could be eligible for these tax credits, as well as Paycheck Protection Program loans, which currently is not allowed.
The Employee Retention Credit can be a very valuable credit to employers during this time. However, the guidance can be confusing and lengthy. There are almost one hundred FAQs pertaining to this credit on the IRS website. Your GBQ tax professional can assist you with your questions and help determine if your company is eligible. We are also monitoring additional legislative changes and updates.